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• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T00587R000300360004-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 16
• Document Creation Date: January 12, 2017
• Document Release Date: May 12, 2011
• Sequence Number: 4
• Publication Date: August 1, 1985
• Content Type: REPORT

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Directorate of
Intelligence
Syria:
Living on Aid
setxer--
NESA 85-10167
August 1985
389
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Directorate of Secret
Intelligence
Syria:
Living on Aid
This paper was prepared by ~ Office of
Near Eastern and South Asian Analysis. It was
coordinated with the Directorate of Operations.
Comments and queries are welcome and may be
directed to the Chief. Arab-Israeli Division, NESA,
Secret
NESA 85-10167
August 1985
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Secret
Syria:
Living on Aid
Key Judgments Syria's economy is in terrible shape and is unlikely to improve for at least
Information available two years, when its new oilfields are developed. Real GDP has declined
as of 22 July 1985 over the last three years, foreign exchange reserves are practically
was used in this report.
nonexistent, and the current account has been in deficit for the last five
years. The economy suffers from incompetent managers, corrupt officials,
and the malaise and inefficiency of a centrally planned system. The
country is also burdened by a defense budget that consumes 55 percent of
its current expenditures. This burden will not be appreciably reduced by
Syria's recent partial troop withdrawal from Lebanon.
Syria has survived on foreign aid from disparate sources. Arab aid,
institutionalized under the Baghdad Agreement of 1978, provides the bulk
of Syrian financial assistance. Iran supplies most of Syria's oil imports,
some free and the rest at discounted prices. The Soviet Union supplies
Syria with the military equipment and training it needs under relatively
generous terms.
Despite Syria's dependence on foreign donors, President Assad has main-
tained foreign policy independence and adroitly used his country's political
and geographic position in the Middle East to exact aid with few strings.
Syria's alliance with Iran in 1982, which went directly against the interests
of its Arab donors, is the most blatant example of this ability
Although Syria's economic prospects have brightened with the discovery of
two new oilfields, the new oil revenue will not cover the current account
deficit, and Damascus will still need foreign aid. These fields could produce
enough oil within two or three years to displace most of Syria's oil imports.
Under current contracts Syria will have to share its new oil wealth with its
US, West German, and Dutch partners, however, substantially cutting the
Syria will face at least two years of increased economic vulnerability,
especially if relations with Iran deteriorate. The Iranian-Syrian alliance-
formed in 1981-82 after the start of the Iran-Iraq'war-was based on
mutual hostility toward Iraq and its President, Saddam Husayn. Iran
gained a conduit for arms and the cutoff of the Iraq-Syria pipeline, while
Syria gained a political ally and substantial economic reward. A break in
Syrian-Iranian relations is likely to occur, however, if the Iran-Iraq war
iii Secret
NESA 85-10167
August 1985
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ends or as a consequence of increasing tension over Iranian or Hizballah
activity in Lebanon. In addition, the economic rationale for the Iranian-
Syrian alliance will end once Iraq finishes its alternative oil export routes
through Saudi Arabia and Turkey.
Arab financial aid-the other major component of Syria's nonmilitary
aid-will continue to decline, and Syria will have to cope with an economic
recession, large balance-of-payments deficits, and heavy defense expendi-
tures. Syria's poor economic situation and its dependence on foreign aid,
however, are unlikely to force a moderation of Syrian policies at home or
abroad.
Assad probably will continue to take advantage of changing political
circumstances to squeeze financial aid from other states. In addition, he
will be looking ahead to exploitation of Syria's newfound oil reserves and is
unlikely to moderate his policies to ease what he perceives is temporary
hardship. If Syria's economic condition continues to deteriorate even when
the new oilfields are developed, Damascus probably will look for ways,
including expropriation, to increase its share of the newfound oil.
Syria's economic situation is not so bad that it will threaten President
Assad's rule. Popular criticism of economic mismanagement to date has
been directed at underlings, not Assad. In addition, the Syrian Government
has continually stressed the need for economic sacrifice on the part of the
people, and the population does not have unfulfilled expectations that could
generate increased unrest.
Political dialogue-rather than an attempt to take advantage of Syria's
poor economic condition-offers the United States the best opportunity to
influence Syrian policy. Damascus has been receptive to high-level US
delegations and demarches and was moved to assist in the TWA hostage
crisis-where Syria shared a mutuality of interest in ending the takeover.
On the other hand, Syria reacted very negatively during the fall of 1983 to
what it perceived as political and military pressure.
Should economic pressure be applied, Syria has two donors, the Soviet
Union and Iran, who would be willing to increase their assistance to
counter any move by the United States. Few inducements would move
Syria away from these supporters. Even if the United States could
persuade Saudi Arabia to end its financial aid-an unlikely possibility-
Syria would not be moved to change the basic policies it has followed for
the last two decades.
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Help From Varied Donors
Oil Aid From Iran
Politically Independent Despite Economic Dependence 5
Prospects Brighten on the Oil Front 6
Implications for the United States 8
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Economic Activity
Buhayrat
at Asad At Raqqah
Al Qtmishll
General Petroleum
Organization, est.
~UNDOF & 0
Al one Damascus
A Qunaytirah
Tapline, est. capacity
300,000 b/d (closed)
As Suwayda'
hawrat
abagah)
Iraq Petroleum Company, est. capacity
1,200,000 b/d (closed)
fl*
?
Oilfield
'g
Textiles
Petroleum refinery
?
Cement plant
d
il
C
G
ru
e o
pipeline
Fertilizer plant
.-~ Refined
rod
t
i
li
~
I
d
p
uc
s p
pe
ne a
ron an
steel
a-
Phosphate
Light industry
?
Salt
Food processing
Hydroelectric power plant
10
Tobacco products
Thermal power plant
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Syria:
Living on Aid
Contrary to Syrian statistics, we estimate that Syria
has been experiencing three years of economic de-
cline. According to official Syrian data, GDP grew at
just over 3 percent per year in real terms in 1982 and
1983. Given last year's economic activity, Damascus
probably will report real growth of between 0 and 2
percent for 1984. Syrian official statistics understate
real inflation, however, thus real growth-as reported
by the Syrians-is overstated by at least the amount
that inflation is understated. We believe that real
GDP probably declined as much as 10 to 15 percent
last year and 5 to 10 percent during 1982/83.
Press and US Embassy reports indicate that real price
rises, often reflected in the black-market price of
goods and foreign exchange, were at least 10 to 20
percent greater than the official rate during the last
three years. This is the result of Syria's comprehen-
sive system of price controls covering virtually all
consumer goods, both imported and domestic, and of
government subsidies on several essential goods and
services. Moreover, Syria's price indexes are mislead-
ing because they cover only limited geographic re-
gions and are based on outdated surveys.
With one of the highest population growth rates in the
Middle East-3.7 percent per year-Syria has experi-
enced an even greater decline in economic growth
when it is viewed on a per capita basis. Living
standards have deteriorated, with many government
workers now holding second jobs. Civil servant pay
The Syrian economy suffers from incompetent man-
agers, corrupt officials, and the malaise and ineffi-
ciency of a centrally planned economy.
delegates to the Bath Party
congress in January cited numerous instances of this
inefficiency and corruption when criticizing Syria's
economic performance. One delegate implied that the
payment of commissions to high-level officials had
resulted in the importation of low-quality rice from
East Asia. Another spoke of $600,000 worth of
medical equipment deteriorating for 18 months in a
port warehouse because it was bought to generate
commissions even though it was not needed. In anoth-
er instance, a showplace pulp and paper plant was
built in central Syria even though the country did not
produce enough extra straw-the mill's source of
pulp-to run the plant.
Even though middle-level Syrian officials recognize
that Syria's position could be helped by reform of its
multiple exchange rate system (see table 1) and
devaluation of the pound, they have avoided these 25X1
reforms. The government fears the popular reaction to
domestic price increases that such a move would
generate. As a consequence, the official exchange rate
is about one-third that of the black-market rate, the
government is critically short of foreign exchange,
and, according to US Embassy reporting, importers
must wait a year to a year and a half for official hard
currency transactions to be approved.
Excessive government involvement has been a major
cause of the decline of the Syrian economy. According
to Syrian statistics, an estimated 51 percent of GDP is 25X1
accounted for by the public sector. The public sector
accounts for nearly 85 percent of Syria's imports and
almost 90 percent of its exports. Syria's poor econom-
ic performance has been worsened by the slump in oil
prices over the last few years, which cut export
revenue, and by a drought that cut into cotton, wheat,
and other agricultural production. The price of Syrian
crude has fallen from a high of about $36 per barrel
in 1980 to about $26 per barrel today. Cotton ex-
ports-formerly a major source of revenue-totaled
only $150 million last season compared to $280
million the season before.
In addition, the economy has been heavily burdened
by Syria's defense budget, generated by its actions in
Lebanon and its efforts to catch up with the Israelis
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Table 1
Syrian Exchange Rate System
Official rate 3.925 pounds/US $ Used for most public-sector
(Not changed since 1976) imports and exports and for
service and financial trans-
actions associated with pub-
lic-sector trade. Also used
for its civilian sector alone (see table 2). When
military imports are included, the average annual
current account deficit almost doubles to an estimated
$3.6 billion. Recent military imports are financed
under relatively generous terms-with lower interest
rates and longer payback periods compared with sales
to other countries-by the Soviet Union, while the
civilian deficit has been financed by aid payments
from other Arab countries and by a buildup of Syrian
foreign currency debts.
for public-sector capital Exports of crude oil and refined products, three-
transactions. fourths of Syria's exports, have been hurt by falling
Parallel rate 5.425 pounds/US $ Used for private-sector im- oil prices and stagnant production levels in Syria's
(Not changed since 1981) ports and most agricultural,
textile, and engineering and northeast oilfields. Syrian production has remained at
chemical industry exports. about 170,000 b/d for several years while Syrian
Used for service and finan- crude prices have fallen $10 per barrel from their
cial transactions associated
with private-sector trade. early 1980s highs. Drought cut into Syria's agricul-
Tourist rate 8.25 pounds/US $ Used for private, including
worker, remittances; for
tourist receipts and pay-
ments; and for interest paid
on foreign exchange ac-
counts held in Syria.
Ad hoc rate set by Central Bank Used for private-sector capi-
tal transactions and for pri-
vate-sector exports not cov-
ered under the official and
parallel rates.
Black-market rate 11 to 12
pounds/US $
Unofficial market for capi-
tal transactions.
militarily. According to US Embassy and press re-
porting, the defense budget accounts for about one-
third of the total budget and about 55 percent of
current expenditures. Although Syria's recent partial
troop withdrawal from Lebanon will cut defense
expenses, these cuts will not have a major impact on
the defense budget or on the Syrian economy. The
units that were withdrawn will be maintained in
Syria, and approximately 30,000 Syrian troops re-
main in Lebanon
Chronic Balance-of-Payments Deficits
Over the last five years, Syria has experienced current
account deficits averaging almost $1.9 billion per year
tural exports last year and forced the country to
import food, including a record 1.4-1.5 million metric
tons of wheat. According to the US Department of
Agriculture, Syrian food imports rose from $600
million in 1982 to $900 million last year.
Syria must import more expensive light crude oil to
mix with its domestic heavy crudes for its refinery
operations, putting Syria's oil trade into approximate
balance in value terms. Crude oil, primarily from Iran
and Libya, and oil products account for about one-
third of Syria's imports
Although industrial supplies make up the next largest
category of imports, numerous press and US Embassy
reports have discussed the shortages of imported parts
and materials faced by Syria's factories. The ineffi-
ciency of the Syrian system is illustrated by the fact
that Syria closed three sugar mills last year despite
the need to import nearly $50 million worth of sugar
per year. The government could not induce Syrian
farmers to produce enough sugar beets or arrange for
beet collection and distribution to the mills. The mill
workers continued to be paid despite the lack of work.
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Table 2
Syria: Balance of Payments, 1980-84 a
-2,160
-2,170
-1,510
-1,989
-1,600
-1,898
-2,458
-1,566
-2,115
-1,700
Exports (f.o.b.)
2,112
2,097
1,903
1,845
1,950
Crude oil
1,334
1,209
974
1,004
NA
Imports (f.o.b.)
4,010
4,555
3,469
3,960
3,650
Services, net
-399
-259
-362
-314
-300
Private transfers
137
547
418
440
400
Official transfers
1,520
1,711
1,292
1,217
1,000
Other capital
-32
128
20
359
NA
Errors and omissions
-25
-15
- 32
49
NA
Overall balance
-697
-346
-230
-364
NA
a Excludes military transactions.
b Estimated.
An Unhealthy Balance Sheet
Syria has been plagued by foreign exchange shortages
for several years. Damascus's official foreign ex-
change position was last published for the third
quarter of 1983 when it was listed at $94 million. We
estimate that, with some fluctuations, Syria probably
has maintained average monthly hard currency hold-
ings of about $75 million since then-equal to about
eight days' worth of civilian imports. According to US
Embassy reporting President
Assad also controls a foreign exchange account that
he can draw on in emergency situations, but it is
unlikely that this account totals more than $100
million, given the current state of Syrian finances.
According to US Embassy reporting, Syria's clearing
account with the Soviet Union has a positive balance
for Syria on civilian transactions that is used to make
occasional reductions in Syria's massive debt to the
USSR for military deliveries. Damascus retains gold
holdings of 833,000 troy ounces, worth about $260
million.
Syria's hand-to-mouth existence often leads to acri-
monious financial relationships with many of its sup-
pliers. Syrian stalling in paying Iran for oil has
resulted in recurring delays in the loading of Syrian-
chartered tankers. There have also been payment
disputes with East European suppliers, although, ac-
cording to the US Embassy, Syria seems to try to
maintain good relations with the Western firms with
which it deals
In the press, Syrian officials like to point with pride,
unjustifiably so, to Syria's relatively small civilian
hard currency debt. The bulk of this debt, reported to
total about $3 billion, is on concessionary terms. This
figure, however, probably does not include Syria's oil
debts to Iran, which we estimate to be as much as
$1.5-1.7 billion, and certainly does not include its
military debts to the Soviet Union. Although we have
little information on Syria's military debt, based on
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our analysis of arms deliveries and probable payback
schedules, we believe that it totals at least $7 billion,
with payments, except those made by barter, present-
ly suspended.
Syria has survived the last few years financially
through President Assad's adroit capitalization on his
country's political and geographic position in the
Middle East. Aid from several disparate sources
reduces Syria's vulnerability to external economic
pressure. By remaining the Soviet Union's closest ally
in the region, Assad has assured his country of the
supply of military hardware and training to confront
Israel. He has exploited Syria's role as the only
credible Arab confrontational state against Israel to
obtain financial aid from other Arab countries, pre-
dominantly Saudi Arabia. Lastly, by allying himself
with Iran against Iraq and shutting down the Iraq-
Syria pipeline, Assad has been able to extract oil aid
from Iran. Iranian aid has gone far beyond the
original scope of the agreements because of Syria's
inability to pay for Iranian oil even at discounted
prices. To maintain its relationship with Syria, Iran
has had either to forgive past debts or reschedule
these oil debts into interest-free loans.
Syria's main sources of financial aid for the last six
years have been other Arab states. This aid was
institutionalized under the Baghdad Agreement of
1978, under which Syria was to receive $1.85 billion a
year for 10 years (see table 3). Saudi Arabia has been
the only country to keep up its payments consistently
since 1979. Libya and Algeria have never paid, and
Iraq stopped payments when Syria allied itself with
Iran in 1982. The oil glut and subsequent revenue
declines caused Qatar, Kuwait, and the UAE to
suspend payments in 1982-83.
Kuwait resumed Baghdad payments to Syria in Sep-
tember 1984 at 60 percent of their former level, which
would total $174 million a year. The Kuwait National
Assembly recently voted to suspend these payments
Table 3
Syria: Annual Baghdad
Aid Commitments
1,850.0 586.7
528.6 528.6
Kuwait 290.7 58.1
Libya 290.7
Iraq 274.9
United Arab Emirates 211.4
Algeria 132.1
Qatar 121.6
again to express Kuwait's dipleasure over Syria's
support of terrorism, its alliance with Iran, and its
actions in suppressing pro-Arafat Palestinians in Leb-
anon. The US Embassy reports, however, that the
Kuwaiti Government will continue to provide $174
million in financial aid to Syria on an ad hoc basis, no
longer calling it a Baghdad aid commitment.
In addition to its Baghdad commitments of $529
million a year, Saudi Arabia has made other pay-
ments to Syria in the last few years. These extra
payments have totaled between $100-300 million a
year since 1980. We believe at least $100 million .a
year of these payments went into the account con-
trolled by President Assad. Saudi Arabia also pro-
vides financial assistance through development loans
and interbank deposits. According to the Syrian Offi-
cial Gazette, Syria and Saudi Arabia agreed last
September to reschedule an overdue repayment of a
$220 million interest-free industrial development loan
and a $200 million Saudi deposit made in 1975 with
the Syrian Central Bank.
Although Libya never met its Baghdad aid commit-
ment, US Embassy reporting
indicates that Tripoli provided $200 million in finan-
cial aid to Syria in early 1984 and possibly $120
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million this year.
Libya occasionally provides Syria with free oil.
Arab financial aid to Syria peaked in 1981 at about
$1.8 billion and has declined every year since then.
Financial aid probably totaled $900 million to $1
billion in 1984, which covered approximately 60
percent of Syria's estimated civilian current account
deficit. Based on probable 1985 donors, Arab aid
payments are'likely to fall again this year, probably to
about $800 million.
Syria profited handsomely from the oil deals it
worked out with Iran following the closing of the Iraq-
Syria oil pipeline in April 1982. Because of Syria's
inability to pay its oil debts, Iranian aid to Syria
during the first two years of their oil relationship was
about four times greater than what Iran had agreed
Syria's delaying tactics in paying its oil debts pushed
Iranian aid in dollar terms to about $1.3 billion in
1982 and 1983. Last year, however, the Iranians
appeared to have held the Syrians more in line, and
aid in dollar terms-that is, the free oil, the discount,
and delayed payments-may total $600-700 million.
Despite Syria's poor economic condition and its de-
pendence on outside aid, President Assad has shown a
keen ability to extract financial aid without strings.
This has been particularly true in terms of his main
financial backers, Saudi Arabia and Kuwait. Syria's
alliance with Iran and the cutoff of the Iraq-Syria
pipeline in 1982 went directly against Saudi and
Kuwaiti interests and desires. This alliance came
about despite talk at one point by the donors of
cutting off aid payments to Syria and, at another
point, of providing additional funds-ranging up to
several billion dollars-if Syria would reopen the
pipeline. Instead of altering Syrian policy, Saudi
During 1982/83, Iran provided Syria with over 7
million tons of oil-I million tons free and most of
the rest at discounted prices. When Syria failed to
pay nearly $1 billion in oil debts accumulated under
that agreement, Iran ultimately forgave the debt.
Under the 1983/84 and 1984/85 contracts, Iran pro-
vided I million tons of free oil annually and 5 million
tons at $2.50 per barrel discount. The free oil plus the
discount cost Tehran about $300 million per year in
direct aid. Syria, however, again failed to pay its oil
debts during the 1983/84 contract period, and nearly
$1 billion in Syrian oil debts were converted into
interest-free loans.
Syria was to start paying $20 million per month on
these loans on 31 May 1985, but it is highly unlikely
that it can come up with the cash to meet these
payments. Syria is once more behind on its oil
payments for last year's contract with no settlement
in sight. A new contract has been signed, but the
problem of the debts still hangs over the relationship.
Iran is likely to proceed with the agreement but may
delay shipments-as it has in the past-as a sign of
its displeasure.
Arabia and Kuwait found themselves continuing aid
to Syria while simultaneously providing large support
payments to Iraq.
Saudi and Syrian interests have diverged over other
issues as well, but Riyadh is unwilling to antagonize
Damascus by reducing its aid. The Saudis dislike
Syria's confrontational approach to foreign policy and
desire an Arab consensus on Middle East issues:
Syria's belligerent attitude toward Jordan and the
Hashemite monarchy conflicts with the Saudi desire
to maintain the regime in Amman. Syrian training,.
support, and sponsorship of terrorist groups are also a
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source of grave concern to Riyadh. Lastly, Syrian
actions to undermine Yasir Arafat and suppress his
supporters in Lebanon go against Saudi policy.
Syrian policy is only starting to conflict with that of
its other major benefactor, Iran. The Syrian-Iranian
relationship is based on hostility toward Iraq and
President Saddam Husayn-and, to a lesser extent,
toward Israel. From the Iranian perspective, Iran has
gained an Arab ally, a conduit for arms, and an entry
into the Middle Eastern arena through Lebanon, as
well as the closure of one of Iraq's major oil export
outlets. Syria has gained political support and a
substantial economic reward.
This mutuality of interests is subject to strain, howev-
er, since Iran's Islamic revolutionary goals conflict
with those of Syria. Syria is a secular country, and its
ruling Alawite minority has violently suppressed its
Sunni majority, including the massacre of thousands
in Hamah in 1982. Iran's aim of establishing an
Islamic republic in Lebanon is also radically different
from that of Syria, which wants to maintain a secular
regime, and Damascus may soon find itself having to
orchestrate a crackdown on Hizballah activity there.
Syrian economic prospects have brightened considera-
bly over the last year. Development work has con-
firmed a major-by Syrian standards-new oilfield
near Dayr az Zawr, in eastern Syria. The first
discovery in the Thayyem field was made in May
1984 by Pectin Syria, which is owned by Shell USA,
Shell International, and Deminex of West Germany.
Oil being produced at the field is light and low in
sulfur content, exactly what Syria needs to mix with
the heavy crudes from its older fields. According to
US Embassy reporting, Pectin also discovered a sec-
ond oilfield, called Ash Shola, west of the Thayyem
field. Oil in both is similar in quality to the crude
Syria imports from Iran and Libya.
Based on reserve estimates and probable field devel-
opment, these fields have the capacity to displace
most Syrian oil imports within two to three years.
The Thayyem field is not fully delineated, but early
estimates of the reservoir size indicate a minimum of
10-30 million barrels with a high probability of
recoverable reserves of 300-400 million barrels,
Aso mid-February three eep wells
and several shallow wells were producing, and the oil
was being trucked south to the T-3 pumping station
on the Iraq-Syria pipeline. There the oil was being
used to pressure test the line that will be used to
carry crude from the field to the Hims refinery
and/or to the coast for export. A spur pipeline is
planned to connect the Thayyem field to the Iraq-
Syria pipeline.
Production earlier this year was averaging about
5,000 b/d and was scheduled to increase to as much
as 10,000 b/d as the logistics of trucking the oil are
worked out. Once the spur pipeline is completed, now
projected for spring 1986, production is expected to
increase to 60,000 b/d. Depending on future field
development, production is forecast to average over
Eventually production may reach 150,000 .
100,000 b/d by 1988,
At the end of April, Syria signed an agreement
forming a joint-venture production company, Al
Furat Petroleum, which will be responsible for com-
mercial production from the Thayyem field. Syria
will hold 51 percent of the company, with the foreign
owners of Pectin Syria owning the remainder. Nader
Nabulsi, Syria's Deputy Minister of Oil, was named
chairman of the board and managing director of the
company. According to the US Embassy, Nabulsi is a
strong decisionmaker with direct access to President
Assad. He probably can override many of the petty
bureaucratic tieups that normally plague Syrian eco-
nomic activity. Progress may be slow, however, as the
Syrians grope with their first large foreign investment
joint venture in many years.
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This would free Damascus from its dependence on
Iran, but it would not mean prosperity. Syria's 1984
civilian current account deficit-before deduction for
foreign aid-totaled about $1.6 billion. Of this
amount about $1.1 billion went for oil imports. Thus,
Syria would still need $500 million in aid to cover its
deficit.
Syria will also have to share its new oil wealth with its
foreign partners. Press reporting indicated that Syria
signed production-sharing agreements giving 25 per-
cent of the oil produced to its foreign partners.
Syria, Damascus would still have to come up with the
hard currency-over $400 million a year at 100,000
b/d production-to pay for its foreign partners' share.
Given Syria's scarcity of foreign exchange, we believe
Damascus will seek to increase its share of the
revenue once Thayyem production increases substan-
tially. This could be accomplished through increased
taxation of the foreign companies, forced renegotia-
tion of the production-sharing agreements, or outright
expropriation.
Although Syria's economic prospects have improved
considerably with its new oil discoveries, Damascus
must still cope with an economic recession, large
balance-of-payments deficits, and continued heavy
defense expenditures. So far, there have been no
radical changes in the regime's economic philosophy
and no meaningful shifts in its economic planning that
would cause an economic turnaround. The last five-
year economic plan-which emphasized industry and
infrastructure development-produced lackluster re-
sults in most cases and outright failures in others. For.
example, Syria's showplace pulp and paper plant
project in Dayr az Zawr closed after it was discovered
that it was cheaper to import paper than to run the
plant. Although the next five-year plan starting in
1986 will emphasize agriculture -a better prospect- 25X1
the system is hampered by Syria's centralized socialist
planning with its built-in inefficiencies.
Damascus will continue to need outside aid. We
believe, however, only Saudi Arabia is likely to make
its payments consistently.
Syria's political and economic relationship with Iran
could unravel in the next two years. The oil agree-
ments have cost Iran much more than it anticipated,
and Iran's financial condition has deteriorated signifi-
cantly because of its war with Iraq. The development
of new Iraqi oil export routes through Saudi Arabia
and Turkey over the next two years will reduce most
of the economic rationale for keeping the Iraq-Syria
pipeline closed. Once this happens, Iran may lose
patience with Syria's delaying tactics on oil payments.
The eventual end of the Iran-Iraq war will reduce
Assad's ability to extract money from Iran. Lastly,
Syrian-Iranian differences over Iranian and Hizballah
activity in Lebanon are likely to`grow.
There is a period of a few years in which Syrian
economic vulnerabilities could increase. Arab finan-
cial aid is declining at a time when Syrian-Iranian
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relations could deteriorate. Significant new domestic
oil production is two or three years away and, depend- 25X1
ing upon the production rates and sharing agreement
at the time, may not produce the dramatic improve-
ment the country needs
Assad may try once again to take advantage of
changing political circumstances to squeeze financial
aid from other states. This could occur if a deteriorat-
ing Syrian-Iranian relationship gives Assad the oppor-
tunity to shift alliances, repudiate debts, and extract
more aid from his Arab donors by acquiescing in a
rapprochement with Iraq.
Syria's deteriorating economic condition causes some
popular dissatisfaction with the government, but it
will not be enough to bring about changes in its
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domestic or foreign policies or to threaten Assad's
rule. Syria's poor economic condition, economic mis-
management, and corruption were major themes at
the Bath Party congress last January, but criticism
was not directed at President Assad. According to US
Embassy and press reports, Assad also escapes popu-
lar criticism for Syria's economic problems, as most of
the people appear to blame underlings. In fact, when
conditions get really bad, Syrians seem to believe that
President Assad will step in to fix the situation.
Although Syria's poor economic condition has caused
some shifting of people at the ministerial level, it is
unlikely to affect the regime's economic philosophy
and domestic policy. The Syrian population has been
conditioned to accept economic hardship as part of the
struggle against Israel and has few expectations of
better economic conditions. The Syrian Government
has deliberately played down the new oil discoveries
to avoid raising popular expectations or jeopardizing
its oil aid from Iran.
Financially and militarily Syria is dependent upon
foreign aid and is likely to remain so for the next few
years. This dependence has not caused Syria to
change its foreign policies, however, and is not likely
to do so in the future. We believe Assad will continue
to exploit Syria's political and geographic position. He
has two major donors, Iran and Saudi Arabia, with
opposing interests that he can play off against each
other. In relations with the USSR, Syria's position as
Moscow's best friend in the region will assure contin-
ued military aid and training despite policy differ-
ences.
Although a break with Iran would increase Syria's
economic vulnerabilities over the next two to three
years, Assad has coped with tough times before. He
might seize the opportunity to repudiate debts to Iran
and extract further Arab aid for coming to terms with
Iraq or Jordan. Assad will also be looking ahead to
exploitation of Syria's newfound oil reserves, and he is
unlikely to moderate his policies to ease what he
perceives is a temporary hardship. If Syria's scarcity
of foreign exchange continues after increased oil
production comes about, Syria could squeeze out its
foreign partners and take over all of Thayyem's oil
output.
Syria's poor economic condition and its dependence
on foreign aid do not place the country in a position
that could be exploited by the United States. Pressure
on Syria from the United States probably would cause
the Soviets and Iranians to increase their assistance
rather than reduce it. Likewise, the United States can
offer no inducements that would persuade Syria to
change its basic policies or move away from its
current allies.
Although the United States could ask Saudi Arabia to
end its financial aid to Syria, Riyadh is unlikely to do
so. The Saudis have consistently met their Baghdad
commitments despite major policy differences with
the Syrians. In addition, Damascus probably would
resort to thinly disguised threats of retaliation should
Saudi largess cease. The Syrians would also turn to
other donors, such as the Libyans, who probably
would give small, but well publicized aid to embarrass
the United States. Lastly, even if Saudi aid were cut,
Damascus would not be moved to chap a its policies
on basic national security issues
The Syrians, on the other hand, have shown an
interest in receiving high-level delegations or de-
marches, which increase their prestige in the Middle
Eastern arena. Political dialogue probably would be
the best way to sway Syrian policy when some
mutuality of interests exist. Syria was moved to
intervene in the TWA hostage crisis when it perceived
a chance to improve its international reputation and to
demonstrate its ability to influence events in the
Middle East.
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